Suppose, as in the previous problem, you buy a home for $400,000 with a down payment of $100,000 and take out a mortgage for the remainder. Over the next three years, the price of the home rises to $500,000. However, during those three years, you borrow the maximum amount you can borrow without changing the value of your home equity. Assume that, at the end of the three years, you still owe all that you have borrowed, including your original mortgage.
a. How much do you borrow (beyond the mortgage) over the three years?
b. What is your simple leverage ratio at the end of the three years?
c. By what percentage could your home’s price fall (after it reaches $500,000) before your equity in the home is wiped out?

  • CreatedDecember 11, 2012
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